Euro falls to fresh two-year lows on bleak eurozone outlook

London (Dec 8) The euro fell to its lowest level in more than two years against the U.S. dollar Monday after a key European official offered a bleak outlook for the eurozone economy.

The shared currency EURUSD, +0.08% traded at $1.2265, from $1.2289 late Friday. It fell to an intraday low of $1.2247, hitting its lowest level versus the dollar since August 2012 as European Central Bank Governing Council member Ewald Nowotny said the currency union is undergoing “massive weakening” and warned the region may move closer to deflation if inflation falls further in the first quarter of 2015.

Separately, the Organization for Economic Cooperation and Development said Monday the eurozone is at risk of sliding back into contraction.

Nowotny’s comments at a conference in Frankfurt came on the same day data showed industrial production in Germany, Europe’s biggest economy, expanded less than expected in October. Output rose by 0.2%, missing a 0.3% forecast from economists polled by The Wall Street Journal.

Nowotny said it was worth the ECB discussing purchasing government bonds to aid the struggling eurozone. Talk of such purchases has weighed on the euro, and is taking place at a time of surging prices and record-low yields on European government debt.

If such bond-buys “compresses down yields and different yield spreads across Europe, the hope is as it filters more into corporate lending, bank lending…that it will start to stimulate the economy,” said Michael Ball, founder of Weatherstone Capital Management, in a telephone interview on Friday. “Lending in general is still declining year-over-year and you’re going to have a hard time picking up any economic growth without any expansion in lending,” he said.

Meanwhile, the dollar slipped against the yen USDJPY, -0.65% buying ¥121.11, from ¥121.44 late Friday in New York.

Earlier in Asian trade, the dollar advanced to as high as ¥121.86, its highest since July 26, 2007. The gains followed strength from an upbeat U.S. jobs report for November, and were supported by expectations that Japanese stocks would rally on an upward revision to Japan’s gross domestic product data for July-September.

But it turned out that GDP shrank more than previously estimated, contracting 1.9% due to a decline in capital spending.

The data confirmed that the Japanese economy shrank for two consecutive quarters, a common definition of recession, and came less than a week before a general election framed by Prime Minister Shinzo Abe as a referendum on his economic policies.

The downward GDP revision “threw a bit of cold water” on the dollar’s strength, said Marito Ueda, director of FX Prime by GMO. Without such a revision, the dollar would have risen further, he said.

“But the basic tide is heading much higher,” said Ueda, adding that the dollar’s next target is ¥124.14, its high before the global economic crisis that began in 2008.

The WSJ Dollar Index BUXX, -0.09% a measure of the dollar against a basket of major currencies, was up 0.1% at 82.29.